Contributed by Yvanna Custodio
Businesses with a global footprint require agile, sophisticated counsel possessing in-depth knowledge of the international aspects of bankruptcy and restructuring. The bankruptcy court decision in Suntech Power Holdings highlights the issues of debtor eligibility under the Bankruptcy Code and the appropriate venue for a chapter 15 case of one such global business: a multi-national group of corporations focused on solar energy. In our two-part series, we first turn our spotlight on the court’s ruling that Suntech was eligible to be a debtor under the Bankruptcy Code and that venue was proper in the Southern District of New York because of a bank account established in New York on the eve of the chapter 15 filing. Tomorrow, we will focus on the court’s center of main interests (COMI) analysis, including whether the activities of the foreign administrators transferred COMI from China (where the debtor listed its principal executive offices as being located) to the Cayman Islands (where the provisional liquidation was commenced). The Cross-Border Proceedings
Prior to the commencement of the Cayman Islands provisional liquidation, the debtor’s principal executive offices were located in China and its principal debt consisted of New York law-governed notes. Moreover, the debtor was defending a $1.5 billion antitrust litigation in the Northern District of California brought by the Solyndra Residual Trust. Upon the debtor’s default on the notes, it agreed to restructure its debt through a scheme of arrangement in the Cayman Islands and a chapter 15 filing.
To maintain a chapter 15 case in New York, Suntech needed to establish both eligibility under the Bankruptcy Code and venue in the Southern District of New York. With less than a month to commence the chapter 15 case, however, it had neither business nor property in New York. As a result, the foreign administrators took steps, albeit unsuccessfully, given the expedited timeframe, to open a New York bank account at Morgan Stanley. Debtor’s counsel then requested the debtor’s claims agent to act as an escrow agent, and the debtor’s funds were subsequently transferred to a non-escrow account of the parent company of the claims agent.
After the chapter 15 petition was filed, Solyndra objected to recognition, arguing, among other things, that the foreign debtor was ineligible to be a chapter 15 debtor, that venue was improper in New York, and that the debtor’s COMI was not in the Cayman Islands. Central to the dispute were Solyndra’s allegations that Suntech engaged in bad-faith manipulation of the case by establishing the New York bank account on the eve of filing. The bankruptcy court rejected the allegations of manipulation and applied a flexible and easy-to-meet standard for eligibility and venue in finding Suntech eligible to be a debtor and venue proper in the Southern District of New York.Suntech’s Eligibility to be a Debtor
Section 109(a) of the Bankruptcy Code sets forth the standard for debtor eligibility, which also applies to foreign debtors seeking chapter 15 relief, and provides, “only a person that resides or has a domicile, a place of business, or property in the United States . . . may be a debtor under” the Bankruptcy Code. The court, quoting another bankruptcy court decision, noted that the section is silent on the requisite amount of property and does not inquire into the acquisition of the debtor’s property to establish eligibility. The court rejected Solyndra’s contention that the foreign administrators opened the account on the eve of filing “to manipulate the placement of the case.” According to the court, “[i]nterpreting the Bankruptcy Code to prevent an ineligible foreign debtor from establishing eligibility to support needed chapter 15 relief will contravene the purposes of the statute to provide legal certainty, maximize value, protect creditors and other parties in interest[] and rescue financially troubled businesses.”
Contrary to Solyndra’s argument, the bankruptcy court held the basis for eligibility was ownership of the New York bank account and not the debtor’s purported conduct of business in California. Applying New York law and finding that title to the account was held by the claim agent’s parent as the debtor’s agent, the bankruptcy court concluded that the account was the debtor’s property.Venue in New York
The bankruptcy court was likewise flexible on the venue question. As to the argument that the foreign administrators manipulated venue by establishing the New York account, the bankruptcy court noted that the foreign administrators had established the account “to solve the eligibility problem” and, by doing so, could not have wrested venue from California, “because the Debtor was ineligible to be a Debtor in the Northern District of California or anywhere else until it established the [New York] account.” The bankruptcy court applied section 1410 of title 28 of the United States Code, which provides a “hierarchy of choices” for venue in a chapter 15 proceeding and found, pursuant to the first subparagraph, that the account was the debtor’s principal asset in the United States at the time chapter 15 was filed.A Spotlight on Eligibility and VenueSuntech turns the spotlight on notable implications for bankruptcy professionals handling cross-border cases. In particular, the bankruptcy court’s interpretation of section 109(a) offers a more “open border” policy for foreign debtors to establish eligibility in the United States. Especially noteworthy is the court’s observation that the section does not provide a minimum amount for the property involved, nor does it require an investigation into how the debtor acquired the property. Once eligibility is established, foreign debtors seeking chapter 15 relief can then rely on their basis for eligibility to likewise establish venue in a particular district.
Although this decision took place in the context of a chapter 15 ancillary case, its implications are arguably much broader. Given that section 109(a) also governs eligibility to be a debtor under chapter 11, it may provide foreign corporations intending to commence a plenary proceeding in the United States a much easier path to do so. Others may argue that the court’s reasoning, which was based on policies underlying chapter 15, suggests that its less exacting application of section 109(a) should apply only in the context of chapter 15.
In tomorrow’s post, we will discuss the bankruptcy court’s COMI analysis and Solyndra’s argument that the foreign administrators had manipulated COMI in bad faith.